IF you follow the global financial news, you are hearing a constant barrage about the huge debt that Greece has on its books. That is a fact; Greek debt is equal to 175 percent of its total annual economic output. But the debt is not the problem; it is only the symptom of the disease.
The problem in Greece and in many other European countries is the common currency—the euro.
The euro was fully adopted as the common currency for the European Union (EU) countries in 2002. Domestic currencies were converted into euros based on exchange rates at the time of conversion. A euro in Greece was “worth” the same as a euro in Germany. But the effect actually made German goods cheaper for the Greeks and Greek goods more expensive for the Germans.
Therefore, currency flows favored the German economy and were unfavorable to the economies of Greece, Italy, Spain, Portugal and Ireland. The German Balance of Trade—net money flows for exports and imports—was relatively flat and constant until 2002. Then it exploded in favor of the Germans as all these other countries were buying German goods because they were comparatively cheaper than before the euro.
Germany, through the International Monetary Fund (IMF) and private institutions, loaned massive amounts of money to Greece in order to keep the money flowing to Germany. Greece and the others took on more and more debt to be able to continue to buy German goods.
Since 1971 following the decision of the US to discontinue allowing the dollar to be convertible to gold or silver, currencies were supposed to float against each other to balance money flows between nations. That decision has inaccurately been criticized for causing all the economic problems in the last 40 years. The opponents claim that gold is the one “currency” that always maintains its purchasing power and is anti-inflationary. That is not correct.
Gold as a currency is just like all other “fiat” money instruments where its purchasing power fluctuates with supply. During the Coloma, California Gold Rush, the price of an egg in gold was the equivalent of $3, while 130 miles away in San Francisco, an egg was priced at US $0.02. The conversion price for one ounce of gold was $20 in both towns. But in Coloma, there was so much gold that an oversupply created price inflation.
Floating exchange rates allow money to effectively move between countries, creating a balance. If Greece needs more German tourists to stimulate the Greek economy, previously they lowered the value of their currency to make traveling there cheaper for the Germans.
Filipinos, better than anyone else on the planet, should understand the Greek situation and why the Greek economic disaster has happened. Between 1983 and 1984, the Philippine peso devalued by 50 percent because no foreign money was flowing to the country after the Aquino assassination. A further devaluation was necessary in 1990 to keep the economy from totally collapsing in the wake of the 1989 coup attempt. The 1997 devaluation was necessary to keep the Philippines competitive with other regional neighbors.
But Greece has not had this critical option to bring money into the country since it joined the Euro Currency System in 2001. The only way it could effectively bring in enough cash was to borrow, and the crisis today is a result of that borrowing, which is a result of the single currency.
Damning Greece for its foolish government spending is
appropriate. But if Greece had not been part of the euro system, Germany and the IMF would not have loaned the billions more in 2009, 2010 and 2012. Greeks would have had to work it out in part by a currency devaluation to attract money inflows.
The current price of a dozen eggs in Berlin, Germany is €2.52; the price in Athens, Greece is €4.04. Theoretically, it is obvious to which country is the money going to flow to buy eggs. But if Greece had its own currency, it could devalue it to make eggs, hotels, restaurants and everything else cheaper.
In the mid-1990’s the Philippine peso exchange rate stayed in the mid-20’s to the dollar because that balanced the cash flow to be less negative for the country. For the 2000’s, the rate was in the mid-50’s for the same reason. Now we are bouncing 45 to the dollar because that rate balances remittances and other inflows’ value, and keeps exports reasonably competitive.
A nation is only a sovereign state if it has clearly defined and accepted borders, and has control of its own currency. Greece and the others are now vassal states of Germany, the IMF and the EU.
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